 "Wealthy investors flock to equities as market uptrend continues")
There is a correction in this article that can be seen at the end of this page.
High net worth individuals (HNIs) are considered more investment-savvy than retail investors. Either they have a team of advisors to fall back on or are quite clued in to the market dynamics. So, when HNIs increase their investment in equities, is it safe to assume there is still scope for markets to go up from these levels, even if it looks volatile in the short term? If experts are to be believed, there are more upsides for the market even as the Nifty has crossed 8,400 levels.
The preference for equity changed after the new government took charge. Prior to elections, investment in equities was low but now HNIs are investing a substantial portion of their assets in equities - both direct equity and mutual funds (MFs), says B Gopkumar, executive vice-president and head (broking) at Kotak Securities.
Though the markets have been volatile, every new high has been higher than the previous one and every low has also been higher than the previous low, which shows investors are getting comfortable with the upwards trend, says George Mitra, chief executive of Avendus Wealth.
HNIs prefer sector funds among MFs such as infrastructure funds, where the companies will gain from resurgence of the economic cycle. They also prefer to invest more in small and mid-cap than large-cap funds, Mitra adds. These trends indicate a higher appetite for risk.
Now, a lot of HNIs and ultra-HNIs are seen following a tactical asset allocation, rather than strategic asset allocation. That is, they skew their portfolio in favour of the markets, says Achin Goel, head, wealth management and financial planning at Bonanza Portfolio.
Further scope
According to Goel, the markets are running ahead of their valuations. However, that's a typical feature of any bull market. While foreign institutional investor (FII) flows are robust, market sentiments favour risk-assets such as emerging markets like India, corporate performance is healthy and market players expect a credit rating upgrade for India. If that turns out to be a reality, we might see another 200-300 points rise in the Nifty from here and 7,900-8,100 shall become its medium-term support. However, there is a note of caution for investors.
Gopakumar advises investors look for specific stocks to invest in, since the index looks high at the current levels. "There is a strong case for allocating to equities for a two-to-three year time frame," he says.
From a medium term perspective, there are more gains. Brokerages such as IIFL believe the Nifty could rise to 10,000 in the next 18 months.
Ashish Kehair, head (private banking) at ICICI Securities, says there can be a reasonable upside from equity even from current levels, provided investors have a three to five years horizon. "The key reasons are that the markets at current levels are still not very expensive and are trading near the fair-value zone. There will also be earnings expansion, as gross domestic product (GDP) bottoms out and demand strengthens in the economy. A decrease in interest rates as we move ahead will also add to the demand momentum, along with decrease in expenses for the corporate sector," he says.
Exiting debt, real estate
HNIs need not always be right. Among other asset classes, portfolios of HNIs have always been skewed due to the large size of real estate. However, there are indications now that HNIs are looking to liquidate some of their real estate investments in favour of equities. Also, in the past five years, investors chose debt as an alternative asset class over equity to build their portfolio.
As HNIs try to get out of real estate and debt assets, liquidity can be an issue at times. For instance, getting out of physical real estate currently is an issue because of the subdued demand. Similarly, getting out of real estate funds or tax-free bonds can be tough, as the market for these instruments is not very liquid.
The size of the investment, paper-work, processing time, and the dependency on market sentiments for real estate buyers make it an illiquid investment. This tells us there are lessons for investors.
"While exiting real estate investment, one should take re-investment risk seriously because exiting this investment takes time. It is likely that by that time, the investment for which you were exiting real estate has already played out. The biggest challenge in exiting real estate investment is to find the right buyer in a short time, to buy at the price that fulfils your expectations," says Goel of Bonanza.
What makes it even tougher is that property prices do not have any benchmark and differ according to location, surrounding areas, prices of surrounding areas, development in the area, amenities, etc.
While debt is relatively liquid compared to real estate, the liquidity depends on the instrument. For instance, if you are prematurely withdrawing from an income fund, you have to worry only about the interest rate risk. If you had invested in a bond which is 'AAA' rated, you will find buyers for it. But if it is an illiquid bond, the cost of selling might be much higher, Goel adds.
Investors in one or two-year fixed maturity plans and who want to shift to accrual funds are finding it difficult to do so because of the lock-in period.
Asset allocation
Kehair advises investors have some core direct holdings in equities. Within equities, an ideal allocation would be around 30 per cent direct exposure across caps, 40 per cent in large-cap MFs, 20 per cent in mid-cap MFs and 10 per cent in small-cap MFs.
"We believe in both mid-cap and large-cap stocks. If growth comes back, there are many mid-cap companies that will do quite well. In our model portfolio, we have 40-70 per cent of large-cap and 30-40 per cent in mid-cap," says Gopkumar.
Within the equity portfolio, the core portfolio should comprise blue-chip stocks and should be 70 per cent, while the satellite portfolio, which can change from time-to-time can account for the remaining 30 per cent, says Mitra.
However, it is recommended individuals should not significantly alter their asset allocations, which could restrict their ability to achieve long-term goals. While keeping their core portfolio intact according to their strategic asset allocation, they should use only their satellite portfolio (which is relatively small) to take high risks to generate alpha returns for their overall portfolio.
Investors can also play out tactical asset allocation by use of derivatives in equities market as a hedge only and not as a leverage.
"We would not suggest withdrawing from other asset classes and investing this into equities. For instance, if one invests in equities right now by redeeming long-term gilt MFs, it might seem like a losing bet if equities remain sideways from here and the Reserve Bank of India declares interest rate-cuts in the next one month," says Goel.
Correction: An earlier version of this article identified the executive vice-president and head (broking) at Kotak Securities as B Gopakumar when in fact it's B Gopkumar. The error is regretted.
High net worth individuals (HNIs) are considered more investment-savvy than retail investors. Either they have a team of advisors to fall back on or are quite clued in to the market dynamics. So, when HNIs increase their investment in equities, is it safe to assume there is still scope for markets to go up from these levels, even if it looks volatile in the short term? If experts are to be believed, there are more upsides for the market even as the Nifty has crossed 8,400 levels.
The preference for equity changed after the new government took charge. Prior to elections, investment in equities was low but now HNIs are investing a substantial portion of their assets in equities - both direct equity and mutual funds (MFs), says B Gopkumar, executive vice-president and head (broking) at Kotak Securities.
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According to a recent report by Crisil, the HNI segment in MFs (individuals investing Rs 5 lakh or more) posted a 15 per cent rise in aggregate folio base in the first half of FY15. The number of HNI folios was 1,063,000 as on March and it had increased to 1,224,000 as of September.
Though the markets have been volatile, every new high has been higher than the previous one and every low has also been higher than the previous low, which shows investors are getting comfortable with the upwards trend, says George Mitra, chief executive of Avendus Wealth.
HNIs prefer sector funds among MFs such as infrastructure funds, where the companies will gain from resurgence of the economic cycle. They also prefer to invest more in small and mid-cap than large-cap funds, Mitra adds. These trends indicate a higher appetite for risk.
Now, a lot of HNIs and ultra-HNIs are seen following a tactical asset allocation, rather than strategic asset allocation. That is, they skew their portfolio in favour of the markets, says Achin Goel, head, wealth management and financial planning at Bonanza Portfolio.
Further scope
According to Goel, the markets are running ahead of their valuations. However, that's a typical feature of any bull market. While foreign institutional investor (FII) flows are robust, market sentiments favour risk-assets such as emerging markets like India, corporate performance is healthy and market players expect a credit rating upgrade for India. If that turns out to be a reality, we might see another 200-300 points rise in the Nifty from here and 7,900-8,100 shall become its medium-term support. However, there is a note of caution for investors.
Gopakumar advises investors look for specific stocks to invest in, since the index looks high at the current levels. "There is a strong case for allocating to equities for a two-to-three year time frame," he says.
From a medium term perspective, there are more gains. Brokerages such as IIFL believe the Nifty could rise to 10,000 in the next 18 months.
Ashish Kehair, head (private banking) at ICICI Securities, says there can be a reasonable upside from equity even from current levels, provided investors have a three to five years horizon. "The key reasons are that the markets at current levels are still not very expensive and are trading near the fair-value zone. There will also be earnings expansion, as gross domestic product (GDP) bottoms out and demand strengthens in the economy. A decrease in interest rates as we move ahead will also add to the demand momentum, along with decrease in expenses for the corporate sector," he says.
Exiting debt, real estate
HNIs need not always be right. Among other asset classes, portfolios of HNIs have always been skewed due to the large size of real estate. However, there are indications now that HNIs are looking to liquidate some of their real estate investments in favour of equities. Also, in the past five years, investors chose debt as an alternative asset class over equity to build their portfolio.
As HNIs try to get out of real estate and debt assets, liquidity can be an issue at times. For instance, getting out of physical real estate currently is an issue because of the subdued demand. Similarly, getting out of real estate funds or tax-free bonds can be tough, as the market for these instruments is not very liquid.
The size of the investment, paper-work, processing time, and the dependency on market sentiments for real estate buyers make it an illiquid investment. This tells us there are lessons for investors.
"While exiting real estate investment, one should take re-investment risk seriously because exiting this investment takes time. It is likely that by that time, the investment for which you were exiting real estate has already played out. The biggest challenge in exiting real estate investment is to find the right buyer in a short time, to buy at the price that fulfils your expectations," says Goel of Bonanza.
What makes it even tougher is that property prices do not have any benchmark and differ according to location, surrounding areas, prices of surrounding areas, development in the area, amenities, etc.
While debt is relatively liquid compared to real estate, the liquidity depends on the instrument. For instance, if you are prematurely withdrawing from an income fund, you have to worry only about the interest rate risk. If you had invested in a bond which is 'AAA' rated, you will find buyers for it. But if it is an illiquid bond, the cost of selling might be much higher, Goel adds.
Investors in one or two-year fixed maturity plans and who want to shift to accrual funds are finding it difficult to do so because of the lock-in period.
Asset allocation
Kehair advises investors have some core direct holdings in equities. Within equities, an ideal allocation would be around 30 per cent direct exposure across caps, 40 per cent in large-cap MFs, 20 per cent in mid-cap MFs and 10 per cent in small-cap MFs.
"We believe in both mid-cap and large-cap stocks. If growth comes back, there are many mid-cap companies that will do quite well. In our model portfolio, we have 40-70 per cent of large-cap and 30-40 per cent in mid-cap," says Gopkumar.
Within the equity portfolio, the core portfolio should comprise blue-chip stocks and should be 70 per cent, while the satellite portfolio, which can change from time-to-time can account for the remaining 30 per cent, says Mitra.
However, it is recommended individuals should not significantly alter their asset allocations, which could restrict their ability to achieve long-term goals. While keeping their core portfolio intact according to their strategic asset allocation, they should use only their satellite portfolio (which is relatively small) to take high risks to generate alpha returns for their overall portfolio.
Investors can also play out tactical asset allocation by use of derivatives in equities market as a hedge only and not as a leverage.
"We would not suggest withdrawing from other asset classes and investing this into equities. For instance, if one invests in equities right now by redeeming long-term gilt MFs, it might seem like a losing bet if equities remain sideways from here and the Reserve Bank of India declares interest rate-cuts in the next one month," says Goel.
Correction: An earlier version of this article identified the executive vice-president and head (broking) at Kotak Securities as B Gopakumar when in fact it's B Gopkumar. The error is regretted.